Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 273

Heed my problems borrowing in my SMSF

SMSFs have enjoyed the ability to borrow to buy property since 2007. However, with the recent crackdown on lending criteria, many options for finance have disappeared from the market.

An SMSF can borrow to acquire an asset provided it complies with the requirements of section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA). This arrangement is commonly referred to as a limited recourse borrowing arrangement (LRBA), where the rights of the lender in the event of default are limited to the asset held under the LRBA. This is not the case for most other loans, which generally have no such recourse limitation, for example, business loans, home loans, investment loans and personal loans. Consequently, the application process is generally more onerous, takes longer and will have less favourable terms, for example a higher interest rate than a similar loan without any recourse limitations.

In considering an LRBA, the source of finance is as crucial as ensuring the LRBA complies with the relevant rules. Even where the LRBA satisfies all the legislative hurdles, failure to secure finance can prove costly for the SMSF.

Obtaining a loan is harder

Starting a few years ago and gathering pace recently, we have seen many lenders either withdraw completely from this space or tighten the lending criteria. I have personally experienced this change with my own SMSF attempting to obtain finance to buy a recently-completed townhouse, just one hour north of the Brisbane CBD. I approached many lenders and went through many arduous application processes, only to come up against a 'no' each time. One of the issues is the requirement for the lender to obtain their own valuation of the property. The difference in valuation on the same property was considerable, ranging from purchase price to $90,000 below. Generally, a value more than 10% below purchase price will see the loan application fail.

Another hindrance has been loan-to-value ratios (the amount a financier will lend as a proportion of the property’s value), which I’ve seen drop as low as 50%. Be prepared to kick in extra cash from the SMSF, as the days of 80% LVRs are long gone.

Even where you meet all the relevant criteria, you can still come up short with a lender’s 'minimum loan amount' condition. I had the experience with one lender where I seemingly met all the requirements, the maximum amount that their lending model said my SMSF could borrow was acceptable, yet the amount was below their minimum loan amount of $250,000.

If you hit a brick wall, then what?

So, if your SMSF has entered into an LRBA, signed a contract, but can’t obtain the finance, what are the options?

First, make sure when the purchase contract is signed that it contains the relevant ‘subject to finance at purchaser’s choice’ clause and obtain legal advice on this before executing the contract. This may give you the option to withdraw from the contract. It's also best to seek legal advice if you believe the fund cannot settle due to being unable to obtain finance.

Second, consider a related party loan. Do you have the ability to borrow against non-super assets and on-lend to your SMSF? Of course, you will have to either comply with the related party lender safe harbour rules, or have evidence that the loan is on commercial terms. This second option may be difficult given many finance institutions may not be willing to lend to your SMSF.

Third, are you able to make a contribution to the fund to assist with the settlement? Be careful though, if you end up with sufficient monies to settle without the need for finance, but the purchase has been done via an LRBA.

Under an LRBA, the SMSF invests in a related trust (a bare trust), and therefore, prima facie, an asset funded by an LRBA is an in-house asset (IHA). However, the regulator has effectively exempted an LRBA from being considered an IHA, provided the LRBA is used for its intended purpose. If not, and there is no actual money borrowed as part of the LRBA, the exemption does not apply and the LRBA is treated as an IHA.

Consequently, where the SMSF can settle on the purchase of a property without the need for finance, but the contract has been entered into under an LRBA, consideration should be given to having a small related party loan. This related party loan could be repaid soon after settlement, however, as the LRBA included a loan amount, the legislative instrument IHA exemption would apply. There would also be the option of rescinding the original contract and executing a new contract in the name of the SMSF’s trustee. However, this requires extreme care and depends on the state jurisdiction. Consultation with a lawyer would be advised to ensure no adverse stamp duty outcomes.

Satisfy all the rules

When it comes to LRBAs, whilst it is important to ensure all the requirements under the law are satisfied, in my experience its equally important to focus on where the funding will come from. And with more lenders withdrawing from this space, this may be easier said than done.

 

Mark Ellem is Executive Manager, SMSF Technical Services at SuperConcepts, a sponsor of Cuffelinks and a leading provider of innovative SMSF services, training, and administration. This article is general information only and does not consider the circumstances of any individual.

For more articles and papers from SuperConcepts, please click here.

RELATED ARTICLES

Sole purpose test needs level playing field

7 vital steps to compliance for your SMSF

Oh dear, not another glitch with borrowing in SMSFs

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.